1988: Back to the human world for a few years

Chapter 546 Financial Schemes
Since the birth of the word "finance", there has never been a lack of various fraud methods.

In order to cover up the truth, many companies use the method of "prematurely recognizing income" to record future earnings in advance. Even the companies that Yang Mo conducted surprise audits on some time ago did this.

So the question is, since there is "premature recognition of income", will there be "delayed recognition of income"?
the answer is……

Have!
However, in professional terminology, this practice is not called delayed recognition of revenue, but rather "postponing the recognition of current profits to later periods."

Moreover, unlike premature recognition of revenue, "premature recognition of revenue" may occur in all companies, but "deferring the recognition of current profits to later periods" basically only occurs in the profit manipulation of listed companies, and in the profit manipulation of a very small number of listed companies.

To understand this thing, we must first understand a basic principle.

Regardless of whether it is inflated or deflated, why would listed companies make financial reports that conceal profits and mislead investors?
Many people may think this is to avoid taxes.

This is the correct answer for non-listed companies...they are thinking about how to evade taxes.

But this is not entirely true for listed companies. Of course, listed companies also consider tax savings, but they need to show investors that the company's profits are growing steadily and in line with their vision.

Therefore, some companies use the method of "premature recognition of revenue" to cover up the truth. It is because they believe that the current period's financial performance is more important than future periods; therefore, they decide to accelerate the recording of future period's revenue in the current period.

Now let's flip this picture and imagine that in certain circumstances, management may want to postpone current period performance in order to increase profits in future periods.

Let's consider this scenario:
A listed company's performance growth today is as fast as grabbing money, or a company suddenly has a huge profit or a huge contract today, like pie in the sky.

Investors certainly love to see numbers like these, but they also hope that management can replicate or even exceed them tomorrow.

It is terrible to satisfy the increasing expectations of investors. This leads to the fact that once faced with a sudden big pie, the first reaction of the management of listed companies is surprise, but then deep worry. There is a famous saying in the industry: paper mounting is meaningless, and investors are ruthless. You can never expect investors to accompany you like formal shareholders. When they cannot get surprises and expectations from you, they will turn around and leave without mercy.

Therefore, from the perspective of listed companies themselves, it is necessary to find a balance between the company's self-destructive measures and meeting investors' return expectations and "postponing the recognition of current profits to later periods."

However, there are not many listed companies that are qualified to use such financial shenanigans;
After all, making money has never been an easy thing, and the size of listed companies is there. For most companies, the probability of getting a sum of money out of thin air that is enough to significantly push up the stock price or even force the company to revise its financial statements to conceal profits is roughly the same as an ordinary person suddenly winning five million.

Of course, God likes to play jokes sometimes, so even though there was a problem with the stock price of Fujisawa Pharmaceutical, it caused several alliance companies led by Sankyo Co., Ltd. to face the distress of a surge in profits in the short term.

………………

In the tea room, Miss Mu glanced at Suzuki Jiken, and then looked at a short old man with concern: "President Inoue, as far as I know, Otsuka Pharmaceutical and Fujisawa Pharmaceutical have had sincere negotiations with your company and Daiichi Pharmaceutical Co., Ltd. twice in just over a week regarding the early large-scale application of chiral catalysts. Such a high frequency of negotiations shows the huge pressure on Otsuka Pharmaceutical and Fujisawa Pharmaceutical;"

"There is an old Chinese saying, 'You can do it once, twice, but not three times... If your company is still hesitant, I'm afraid that some changes that no one wants to see will appear at that time!"

Miss Mu sighed softly: "Whether it is your company or Fujisawa Pharmaceutical, they are both key member companies of the China-Japan Economic Promotion Association. We all share the same interests. As the chairman unit, our Dahua Company really does not want the good situation we have just built to be ruined... You know, during this period of time, in order to assist Fujisawa Pharmaceutical in transferring part of the drug technology and production capacity to the newly established joint venture and subsidiary companies through book business, whether it is your company or Daiichi Pharmaceutical Co., Ltd., the funds between these member companies are unprecedentedly high. I am afraid that Fujisawa Pharmaceutical will take risks under the pressure of stock prices..."

Having said this, Miss Mu stopped talking and looked at the old man quietly. The meaning of her words was self-evident.

We are not all innocent, and this is an indescribable island country where all kinds of financial fraud and cheating are rampant in private. If Fujisawa Pharmaceutical is really pushed into a corner, do you think they won't use the borrowed funds for other purposes by robbing Peter to pay Paul?
Currently, the amount of funds borrowed between your member units has reached 2200 million US dollars per week. Fujisawa Pharmaceutical does not need to move too much. "Borrowing" to million US dollars will be enough for you... You have to know that this is real cash flow, not a string of asset numbers on the books.

As for the consequences...

Haha, other than a complete breakup between your companies, how serious could the consequences be?
You have to figure out who the investor who is truly most responsible is, whether it is Fujisawa Pharmaceutical or your Sankyo Co., Ltd.!
Are those really leeks?

Or is it the mouthparts sticking out of those chaebols?

Since these rewards are being transferred from the left pocket to the right pocket, how do you think this will end?

Isn't it just changing a president and bowing to apologize? What else can be the result?
Even in the newspapers, the news won’t be published for you.

In the end, don't you have to swallow the bitter fruit yourself?

The old man naturally heard what Miss Mu had not finished saying, and guessed most of what she was thinking.

At first glance, Miss Mu's speculation seems to be very Chinese in nature. It is just the logic of state-owned enterprises. It gives people the feeling that they were completely ignorant of the world in the 1970s and 1980s. But in fact, it is a very accurate prediction. Even as an old man, he has to admit that although there are huge differences between the national conditions of China and Japan, as far as this matter is concerned, the result is likely to be very similar to what Miss Mu guessed.

Thinking of this, his expression did not change, and he just glanced at the other party lightly: "Minister Mu, I am very grateful that you are willing to put yourself in the shoes of our Sankyo Co., Ltd.... I have to say that in this regard, Minister Mu, you value us strategic partners more than President Yang."

The old man was indirectly expressing his dissatisfaction with Yang Mo. After all, although Sankyo Co., Ltd. was known as Dahua's strategic partner, Yang Mo had no further valuable in-depth cooperation in the past year or so, except for a number of projects that had been finalized long ago, such as the GAP planting base and the artificial Coriolus versicolor cultivation base... Although the Sino-Japanese jointly developed chiral catalyst and the China-Japan Economic Promotion Council were of great significance, they were not a separate cooperation with Sankyo Co., Ltd., and therefore could not be included.

After expressing his protest briefly, the old man changed the subject: "So, I'd like to listen carefully. Minister Mu, do you have any good suggestions at this time?"

At this point, the old man glanced at Suzuki Jiken beside him and said, "I heard from General Manager Suzuki that you invited us here to discuss profit manipulation. From what you said just now, I think you want Sankyo Co., Ltd. to accept the advice of Otsuka Pharmaceutical and Fujisawa Pharmaceutical, take the risk of commercializing the newly developed chiral catalyst on a large scale, and then use the method of postponing the recognition of current profits to a later period to maximize the elimination of the risks brought about by the surge in stock prices."

After a slight pause, the old man rested his hands on his knees, staring straight at Mu Liya, with a faint smile on his lips: "I don't know, Minister Mu wants to suggest that we defer revenue, smooth profits... or simply move the current sales to a later period?"

When Mu Liya heard this, her pupils shrank slightly, and when she looked at the old man's eyes, a hint of suspicion flashed across them.

The method of deferring the recognition of current profits to later periods is common knowledge in later generations. Not to mention working as VC/PE in investment banks, even people who have a little knowledge of accounting basically know it. But at the moment, it is a brand new method that is still in the exploratory stage. Therefore, the fact that this old man named Inoue mentioned three ideas in one breath really shows that this president is not just there to do his job.

The so-called "deferred income" is actually the withdrawal of reserves in the current period, which is transferred back in the later period to form later profits; it is just that this profit manipulation method requires adding the balance of the balance sheet liability account "deferred income (or unspecified income)" to the accounting entries, which has evolved into an abbreviation.

The benefits of doing this are:

1. It is relatively simple and convenient. When the company needs this income in the future to increase the company's book profit and provide investors with a beautiful financial report, it only needs to make another entry and move it to income.

2. It is relatively stable in the current audit environment. Since these funds are the company's legitimate income, but they are not all recorded in the income account at present, the auditor will not ask too many questions and generally will not delve too deeply into it.

In fact, this method of deferring revenue once became the main means of profit manipulation for listed companies that needed to "store up food and grass for famine years" in the 1990s. It was not until the late 1990s that Microsoft was investigated in detail for suspected monopoly. At the same time, because their unrecognized revenue (quarterly) was so exaggerated, it aroused the vigilance of the industry and even prompted the CPA associations of various countries to issue new position statements. This method of shifting trade profits to the later stage was judged to be a violation; even the infamous accounting fraud of Enron in the millennium was essentially due to the use of this method.

As for "smoothing profits", there are actually many ways to do it.

However, the mainstream methods at present are mainly "using reserves to smooth profits" and "using improper accounting of financial derivatives to smooth profits". However, using reserves to smooth profits is a serious crime; Dahua is a central enterprise, and its current business scope does not include finance, so the method of "using improper accounting of financial derivatives to smooth profits" will not be explained in detail... But you can know how this method works just by looking at the name. If you are a stock investor, take a look at what you can see, or review the subprime mortgage crisis in 08, you may also find some very clear signs.

As for the old man's final addition of "moving the current sales revenue to the later period"...

Not only is the method too crude, but since it requires cooperation with your main business clients through verbal commitments, the variables and risks in the middle are too high. Even if there is no auditor to check you, you may fail because of a small episode in the middle, so we will not discuss it here.

(No one will say I’m stupid this time, right?)

........................

Mu Liya faced the old man's slightly teasing gaze, while quickly thinking about why this guy suddenly showed an attitude that was not in line with social etiquette, and whether there were some variables that she was not aware of; at the same time, she picked up the teacup and took a sip very elegantly.

After putting down the teacup, Miss Mu kept smiling, but shook her head slightly: "President Inoue, none of them."

As he spoke, he tilted his head slightly to look at Suzuki Jiken, who was sitting next to him the whole time. After finding that he could not tell any useful information from his face, he said, "President Inoue, Managing Director Suzuki, have you ever considered manipulating earnings by withdrawing a large amount of merger reserves, and then effectively avoiding the impact of huge profits in the short term on your company's stock price?"

The old man and Suzuki Jiken looked at each other, and there was a sudden sense of surprise and complexity in their tone: "Withdrawing a large amount of merger and acquisition reserves?"

Miss Mu nodded gently. "That's right. A large amount of M&A reserves are withdrawn to reduce income in the remaining period before the completion of the M&A transaction. If the M&A fails, it will be converted back into profit in the later stage."

When the old man heard the words "the remaining time before the completion of the merger and acquisition transaction", a gleam of light flashed in his eyes.

In fact, profit manipulation by withdrawing a large amount of merger reserves is not a very new method at present. Since the island country entered the complete bubble period, some companies, especially those listed companies in the island country with "second businesses", have also used this trick.

After all, you have to know that in a completely open capital market, mergers and acquisitions are the most common means for real enterprises to grow and develop... Of course, valuable and potential merger and acquisition targets are hard to find at any time.

But it is not important.

What is important is that the act of merger and acquisition itself will bring some huge challenges to investors. Not only is it difficult to conduct year-on-year analysis for the merged company, but the merger and acquisition accounting standards will distort the cash flow from operating activities. Not only does it require the withdrawal of merger and acquisition reserves before the formal submission of the merger and acquisition application, the acquired company may also hide some of the income earned before the merger and acquisition. Therefore, the purchasing company can recognize these incomes in the period after the merger and acquisition... When these points are combined, it has the function of converting profits into operating costs, freeing up funds, and even slightly increasing the company's actual profits. In addition, it is extremely troublesome to audit, and the audit department will want to avoid it when they see it.

Therefore, if you want to avoid the rapid rise in stock prices caused by huge profits in the short term, there is no more effective method than this.

However, although this method is a very good choice in terms of safety, operability, and even smoothness, it has a prerequisite...

Thinking of this, the old man took a deep breath and stared at Miss Mu with burning eyes: "Mrs. Yang, do you mean... Dahua Company has a good project shell that we can cooperate with?"

Given the current collapse of the island nation's stock market, if there is no good M&A project as an excuse to set aside M&A reserves, not to mention that investors will not believe it, even official departments will immediately come to you to inquire and investigate - don't think that the island nation can really do whatever they want with their American father, they are still working hard to prevent capital flight from their country.

Therefore, this is the main reason why President Inoue did not mention the method of making a large amount of withdrawal of merger and acquisition reserves. Now that the bubble has just burst and all kinds of assets and labor are still extremely expensive, where can there be any good projects in the country for them to acquire?
The old man's address to Miss Mu suddenly changed from "Minister Mu" to "Mrs. Yang", and the meaning was self-evident.

As the world's developed economies turn to resource mercantilism, the reason why most companies in the island countries choose China as their preferred investment destination and trading partner is certainly due to the geopolitical reasons mentioned above and the consideration of industrial confrontation with America, but more importantly, they can obtain China's resources and markets through such cooperation.

But the problem is that they are aware of this, the Chinese people are aware of it, and Yang Mo is even more aware of it. Therefore, in the process of cooperation, the situation that they originally imagined that they would wave money and the other party would come running to do good things did not happen at all.

So until now, their biggest feeling is that when dealing with Yang Mo, you get what you pay for, or even get what you pay for. It is already not easy to achieve an equal exchange, and if you want to take advantage of him... forget it!
It is obvious that under such circumstances, Miss Mu would definitely not be so kind as to take the initiative to worry about the fatal problems that Sankyo Corporation would face after the sudden surge in stock prices. She might even hope that the stock price of Sankyo Corporation would fall rapidly after its surge, so that Dahua Company would have more opportunities to take advantage of.

But Miss Mu took the initiative to care about this matter, and even thoughtfully gave them a relatively safest profit manipulation plan.

This was clearly a ulterior motive, but it also meant that Yang Mo had agreed to this matter - currently only China had many potential projects, and among them, only a few large companies, including Dahua, had high-quality projects with huge potential for value-added in the short term and controllable risks.

In other words, only by merging with high-quality projects offered by large enterprises such as Dahua can it be considered good news to convince investors, and a large amount of merger reserves can be successfully set aside while the relevant departments of the island country turn a blind eye.

Of course, this is not the point.

The key point is that in the case of equal exchange, since Yang Mo wants something, he will definitely offer real benefits in exchange.

and so……

The merger reserves set aside may not actually be converted into profits for Sankyo Corporation in the later stage, and the project shells that Dahua Company uses to deceive people may not really be shells.

Mu Liya didn't mind the fact that the old man suddenly changed his way of addressing her to Mrs. Yang. She knew very well that although the overseas brands she was in charge of were thriving in the island country, in the eyes of these people, her weight was far inferior to that of Yang Mo, who had a large amount of resources in the country and had made the other party suffer countless losses.

Sometimes the person who respects you the most is often your opponent.

Therefore, for some things, discussing them as "Mrs. Yang" is much more convincing than discussing them as "Minister Mu"... She even believed that if she didn't negotiate some things as Yang Mo's spokesperson, the other party wouldn't even bother to listen.

Thinking of this, Miss Mu pursed her lips slightly, but lowered her voice a bit: "There are no shell projects in China, but there are two good projects in Laos."

"President Inoue, I'm sure you've heard from Director Song that in addition to expanding the market in Central Asia, Dahua is also planning to vigorously develop the Mexican market. So... I wonder if you are familiar with the generic drug factories we opened in Laos?"

Mexico?
Laos?

Generic drug factory?

The old man looked at Suzuki Jiken beside him, as if he understood something all of a sudden, and a gleam of light flashed in his eyes.

After coughing lightly, the old man showed a hint of pride on his face that was difficult for others to detect: "Mrs. Yang, I roughly understand your intention of inviting me and General Manager Suzuki to come here today;"

"But friendship is friendship, business is business. I have something to say, but I don't know whether I should say it or not..."

------

PS: I have a lot of things to do recently, and they are all very urgent, so I would like to say hello in advance. I will try my best to update during this period, but don’t be surprised if there is suddenly no update one day and I haven’t written a note asking for leave, because it is most likely that I am unlucky enough to be conscripted to work as a slave.

Hey ~
Why does the life of a young boy have to be so vicissitudes?
(End of this chapter)